Dental partnerships can be a rewarding way to operate a successful dental practice, but they are not without potential pitfalls—especially without a carefully crafted partnership agreement. While each partnership is unique and the agreement will need to be tailored, there are several important legal considerations that should not be overlooked.
For example, Arizona law will imply a partnership whenever two or more individuals engage in a common business. In fact, under A.R.S. Section 29-1012, a partnership can be created even if the parties did not intend to create a partnership. As you can imagine, this can create unintended consequences. For example, partners in a general partnership can be jointly liable for all debts of the partnership under Arizona law. Therefore, if your partner incurs a debt on behalf of the partnership—even if it is without your approval or even knowledge—you can be held personally liable for the debt.
For this reason, dentists should almost never structure a joint practice as a general partnership. Instead, dentists can achieve the same level of flexibility through the creation of a limited liability company (LLC) or professional limited liability company (PLLC).
Even with an LLC in place, the partners will need to consider how their practice will be run. If not, there are default rules under Arizona law that may or may not meet your expectations or intent when forming the LLC. Accordingly, it is much better to set things up formally, by picking the entity that best meets your needs and outlining the rules that will govern the practice in the corresponding operating agreement.
There are a host of considerations that dentists should consider, including but not limited to:
- Will the partners be 50/50 owners?
- Will the partners make equal contributions to the practice to get it started or will one party be buying in over time?
- How and when will profits be distributed?
- Will the dentists pay themselves salaries for working at the practice?
- Who will make the day-to-day decisions for the partnership?
- Will one partner be appointed the manager, or will decisions be made jointly?
- Do you want to put a cap on each owner’s authority, so that decisions above a set amount must be approved by all partners?
- What other decisions should all partners have to make jointly?
An experienced attorney can help set up the appropriate entity and draft an operating agreement that sets up a framework that meets your legal needs and vision for the practice.